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How Your Phone Will Become Your Wallet and Credit Card

Credit cards as we know them could become as obsolete as cassette tapes.

Paper receipts could become as antiquated as parchment.

And you may soon be tempted in more intrusive and enticing ways to spend money.

Welcome to the future of digital payments.

While there’s always been chatter about eliminating the penny, which costs more to make than its actual value, the revolution coming to money involves a lot more than just deciding whether or not to round to the nearest nickel.

Our phones could soon be our wallets and companies will soon know more than ever about our shopping habits. Read on to find out how this will shake out and how it will affect you.

What the Future Looks Like

If various financial institutions, telecoms and retailers have their way, I will someday walk into a lunch spot for the first time and say, “Charge it to Laura,” as if I were a regular. And my phone, tucked away in my purse, will pay for me. (You can actually do this at some small merchants now and will be able to do this at Starbucks very soon.)

No more rummaging through my wallet for that last penny on my $8.84 transaction. No more having to wait for a credit card machine to approve a transaction and spit out two copies of a receipt–one for me to sign and one to end up crumpled at the bottom of my purse. And no more being stuck with goods I don’t want because I can’t find the receipt to return them. The minute my phone and I enter the store, the store will “see” me and my digital wallet.

But I’ll be paying a price for this convenience: retailers, financial firms and/or mobile network companies will know what my spending triggers are: what kind of coupons will get me to buy, what purchases I can never resist, what snack I love to munch on while watching a movie–and they’ll use this knowledge to barrage with me ads, coupons and other specials to get me to spend more and more.

As Sachin Jaitly, vice-president of business development at The Neat Company, a firm specializing in paperless systems, including digital receipts, says, “Facebook has likes, but there’s nothing more valuable than knowing you bought tickets for Dark Knight in this zip code and an ice cream cone at the theater. When I know all your transactions, I can do couponing and serve a targeted ads to you. For instance, I might see that every time you buy a blue purse you buy a red shirt.”

What Digital Payments Look Like Now

While Paypal has handled digital payments for a long time, Paypal is used mostly in e-commerce. The company that has done the most to push the boundaries of digital payments is Square, a San Francisco-based startup started in 2009 by Twitter co-founder Jack Dorsey.

The company began with a small, plastic square smartphone attachment that could process credit card transactions. In three short years, it has enabled about two million small business merchants who had largely used cash (such as piano teachers, cab drivers and babysitters) to start charging their customers, leading those small businesses to report sales increases of 20%, according to Fortune.

But the card reader was only Square’s first foray in its eventual goal to “carry every transaction in the world” as Dorsey told Fortune. It now has an app that lets merchants run their store using an Apple mobile device such as an iPad. But the app is more than just a card swiper: It keeps track of inventory, helps the stores run loyalty programs, and helps come up with Groupon-style discounts that aren’t emailed out to masses but targeted at shoppers that data show are likely to buy.

This fall Square will start to process all Starbucks’ credit card transactions. The cash register will show your name and photo when you walk in the store with your phone, and then all you’ll need to do to pay is say your name.

But don’t just think digital payments are only being done by Square. A lot of other companies are in the space, too. But as you’ll see in a second, that’s part of the problem.

Obstacles to Our Seamless Purchasing Experience

The main issue that keeps digital payments from being widespread is fragmentation. Everyone has a different way of going cashless, and they all want everyone else to adopt their way. Here are some of the other services and their challenges.

Internet payment service Paypal has more than 100 million accounts, but Jaitly says its clunky user interface has kept it from being widely used in anything but on websites such as eBay, which owns it.

Google Wallet has rolled out using a technology called near-field communication (NFC), but unfortunately, not many cash registers have NFC capability.

Starbucks has an app that allows you to use your smartphone to pay, but you can’t use it anywhere else.

Apple just released a Passbook app with its iOS 6. PC Mag reports, “Passbook is a virtual wallet that does much more than pay bills. Your phone will pay for your groceries and anything else you want to purchase. It will also cache all your clipped coupons and stored rewards from your shopper discount cards. Not to mention, it’ll provide you with in-store deals.” But it’s very new, so the challenge is finding merchants that use it.

One of the best ways to illustrate the fragmentation is to explain how to use your smartphone to pay for your coffee at Peet’s: You have to use MasterCard via Google Wallet and it’s only on certain phones and they have to be on the Sprint network.

What none of these companies can offer, however, is the ability for you to pay with any credit or debit card you like and to pay with anything as simple as an email, a wave of your phone or the mention of your name and to do this at any retailer you like.

Also, there’s a chicken-and-egg issue: Merchants don’t want to switch to a new system unless they know they’ll have customers who can use it, and phone makers and telecoms don’t want to adopt a system unless they know it can be used at a lot of merchants.

So the dream is that smartphones will someday be a wallet, a credit card reader, a mobile cash register, a coupon book, a comparison shopping tool, a loyalty card holder and an in-store guide to coupons and specials. But for now, it’s mostly a battleground.

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LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment advice. Please consult a financial adviser for advice specific to your financial situation. LearnVest Planning Services and any third-parties listed, discussed, identified or otherwise appearing herein are separate and unaffiliated and are not responsible for each other’s products, services or policies.